It’s natural to focus on the costs of retirement. Replacing lost income, planning to go for the rest of your life without ever drawing another paycheck, is the boldest financial step that most of us will ever take.
In fact, it’s so easy to focus on the costs of retirement that it can be easy to overlook the costs of aging. But the medical costs associated with simply getting older aren’t just a single part of planning for retirement. Health care is one of the largest expenses associated with retirement, often second only to housing, costing many couples more than $285,000 from age 65 on. (Other studies suggest planning to spend anywhere from $3,000 to $7,700 a year on health care in retirement.)
This is a major expense, and managing it takes planning.
Understand the Costs
The first thing to understand is where those costs come from. Many different issues drive medical costs as we age. Unfortunately, the simple truth is that getting old causes your body to weaken, your immune system to deteriorate, and health issues to become both more common and more severe. However, there are two issues in particular to pay attention to, because they’re two of the most foreseeable risks that retirees will face:
One of the largest areas of medical spending for retirees is chronic conditions. These are persistent medical conditions that last for months or years. (The definition varies from a condition lasting more than three months to one lasting for more than a year.) Chronic conditions tend to drive up medical bills because they’re not subject to cures. Rather, you need ongoing treatment for the symptoms. That means paying for ongoing medical bills.
Chronic conditions can range from low-grade problems such as joint pain or high blood pressure to back problems, mental health issues or even long-term cancers. (Common ones also include diabetes, high cholesterol, heart problems and arthritis.) Most, if not all, adults will develop at least some as they age.
Medicare and Insurance Gaps
More than 15% of Americans rely on Medicare for their primary or exclusive health insurance, most of them over 65. Most Americans over 65 receive it and use the program to one degree or another. The problem is that the benefits under this program aren’t generous enough to pay for all of a typical retiree’s needs.
Medicare, like many insurance programs for retirees, leaves fairly significant coverage gaps when it comes to long-term services, chronic treatment and specialty treatment. It also, again like almost all insurance programs, comes with cost sharing requirements that can leave seniors picking up a significant share of the bill. Together, these factors can create a substantial financial liability even for people with insurance.
Take Care of Yourself Today
It’s difficult to overstate the role of chronic conditions when it comes to health care spending in retirement. Nationwide these issues account for more than 75% of all medical spending, much of that focused on senior citizens. In fact, according to one study, 96 cents of every dollar Medicare spends relates to a chronic condition.
And they are very highly linked to lifestyle choices.
Put simply, as Americans we tend to lead unhealthy lives. We eat too many bad foods, exercise too little, work too hard, see the doctor infrequently and otherwise take relatively poor care of ourselves. Over time these choices erode our own health and develop into chronic conditions such as heart disease, diabetes, pain on overstressed joints and lung disorders. The older you get the more likely it is that poor health choices will develop into a chronic condition, and the ones that you take with you into old age will not go away.
So the best thing you can do to keep down expenses in retirement is simple: change your lifestyle today.
Begin to exercise regularly, dropping weight and getting your blood pressure, lungs and heart into a healthier place. Choose a better diet, especially as you head into middle age, and pay attention to the liquor, sodas and sweets. Above all else, find a way to quit smoking. Nothing will guarantee high future costs like a tobacco habit. (And no, it doesn’t matter whether you strike a match or charge a device.)
Cover Cost Sharing
Approximately 20% of Medicare beneficiaries have no supplemental coverage. This has created one of the biggest crises in retiree medical spending, as they don’t qualify for Medicaid but (typically) can’t afford any other forms of insurance. For them, the costs of co-pays and cost sharing will add up.
In fact, a study by the Kaiser Family Foundation found that in 2016 alone Medicare beneficiaries averaged more than $5,800 in out-of-pocket spending.
So the next best thing you can do for yourself is to prepare for those costs.
There are many ways to approach cost sharing, particularly depending on whether you will rely on Medicare or private insurance for your health care. Health savings accounts let you save for your copays in a tax-advantaged structure. Gap insurance helps to cover costs that your insurance plan might not pay for. And simply seeking better, lower cost, insurance may be a viable option for retirees with their own plans.
However you do it, preparing for cost sharing will be the best way you can address the bills you’re likeliest to see.
Plan for Long Term Care
According to an estimate from Fidelity, you should expect to spend about 15% of your income on health care in retirement. Some of this will be simple trips to the doctor’s office and checkups while you’re still relatively young and healthy.
But age catches up with us all. Sooner or later many retirees will need some form of long term care. Whether this is a home health aide, a retirement community, or even a full-time nursing home, there may come a time when you can’t put this off any longer. Be prepared.
As part of your retirement planning, prepare for how you’ll pay for long term care if (and when) you should ever need it. The costs of a care facility can be quite high, and many insurance programs won’t cover them. Be prepared to do so for yourself.